Men who don’t work: when did economists stop being wrong about the economy?

The 4.9 percent unemployment rate is getting close to most economists’ estimates of full employment. In fact, it is below many estimates from recent years and some current ones. Many policy types, including some at the Federal Reserve Board, take this as evidence that it’s necessary to raise interest rates in order to keep the unemployment rate from falling too low and triggering a round of spiraling inflation.

The argument on the other side is first and foremost there is zero evidence that inflation is about to start spiraling upward. The Fed’s key measure, the core personal consumption expenditure deflator, remains well below the Fed’s target and shows no evidence of acceleration. The same is true of most wage growth measures.

But there is also good reason for skepticism on the current unemployment rate as a useful measure of labor market tightness. Other measures of labor market tightness, such as the percentage of workers employed part-time for economic reasons and the share of unemploymentdue to voluntary quits, remain close to recession levels.

Most importantly, there has been a sharp drop in labor force participation rates. As a result, in spite of the relatively low unemployment rate, the employment rate is still close to 3.0 percentage points below its pre-recession level. This story holds up even if we restrict ourselves to looking at prime-age workers (between the ages of 25–54), with an EPOP that is close to 2.0 percentage points below pre-recession levels and almost 4.0 percentage points below 2000 peaks.[1]
The response of the proponents of higher interest rates has been to attribute this drop to a problem with prime-age men rather than a lack of demand in the economy. For example, Tyler Cowen argued that less educated men were watching Internet porn and playing video games rather than working. The problem with this explanation is that the decline in EPOPs is comparable for non-college educated men and women. There is also a decline in EPOPs since 2000 for both college educated men and women, albeit a smaller one than for their less-educated counterparts.
Since there is a drop in prime-age EPOPs for all groups, this would seem to suggest that the main problem is a lack of demand and not some new difficulty that some relatively narrow group of workers has in dealing with the labor market. Before going through these trends, it is worth making an additional point; this decline in EPOPs was not expected before it happened.

For example, the Congressional Budget Office (CBO) in 2001 projected that EPOPs would continue to rise from their 2000 peaks. It projected that the potential labor force would grow at an average annual rate of 1.1 percent over the next decade, implying that it would be 11.6 percent larger in 2010 than in 2000 (Table 2). This growth was driven in part by population growth, but also by the expectation that the trend of rising EPOPs for women would continue.

In fact, the labor force in 2010 was just 7.9 percent larger than in 2000. This 3.7 percentage point difference corresponds to a labor force that was 5 million smaller in 2010 than CBO had projected for that year in 2001. (It is worth noting that the CBO projections were not an outlier. CBO tries to ensure that its projections lie close to the middle of the pack for economic forecasters.)

If the argument that structural factors have led to a permanent lowering of prime-age EPOPs is right, as opposed to just weakness in demand reducing employment, then the 2001 projections for the growth of the potential labor force were clearly wrong. Of course official projections have often proven wrong, but this should give us caution about our ability to accurately assess the structural determinants of employment rates. After all, it’s not obvious that our knowledge of the economy is very much better in 2016 than it was in 2001.

The figure below shows the employment to population ratios for prime-age workers by gender and education levels.

Source: Authors’ analysis of data from the Current Population Survey.

The ratios for 2000 are set at 100 to allow for a clear view of the drop off from this peak. As noted, all groups see some drop from this peak, with the smallest drop for college-educated women, followed by college-educated men. The drop for prime-age workers with some college is considerably sharper, with the drop for women being somewhat larger than the drop for men. The drop for workers with a high school degree or less is even greater, but here also the drop is larger for women than for men. The decline in EPOPs for prime-age men with a high school degree or less is 7.8 percent, while the drop for women is 14.0 percent. Given the much sharper drop in EPOPs for less-educated women, it is difficult to understand why the policy debate has focused on men leaving the labor force.

The more fundamental issue is that it is difficult to explain a drop in EPOPS for all workers, regardless of education levels, as being a problem of workers lacking skills or a desire to work. This looks pretty clearly like a story of weak demand. In other words, the problem is not them; it is us, where “us” is the people who make economic policy.

[1] This discussion focuses on EPOPs rather than labor force participation rates (LFPR) because the latter has likely been affected by the tightening of rules for getting unemployment insurance. It is widely recognized that many unemployed workers drop out of the labor force when they are no longer eligible for unemployment benefits. With many states having instituted stricter rules on benefits over this period, we would have expected a decline in LFPR even with no changes in the workforce or the economy.

Thank you Dean and Cherrie, clear enough, although I had to look twice for a full type out for EPOP, the employment to population ratio. Search tools today get one an anwer pretty fast even for undefined terms from the economics profession.

I like to keep one ear on issues like this attuned to the dynamics of America’s presidential race, where I hear military Keynesianism the likely stimulus from Mr. Trump, and a too hyped “infrastructure program” from Mrs. Clinton, although a war on Isis can’t be ruled out from her either, probably depending on the pressure of events that she feels she will have to respond too.

I don’t see Mrs. Clinton’s infrastructure program as reaching those who are most likely in need of full time work, or formal work at all. Economists don’t seem to want to wade across disciplines here, because I see Michelle Alexander, Matt Taibbi and the Harvard Law Review having delineated for us, by their books and essay, the world of those stigmatized by minor criminal offenses, mostly drug charges or failure to pay fines (That would be “The New Jim Crow,” “The Divide,” and “Policing and Profit.” Lots of missing demand hiding in the one person consulting firms which discarded managers from corporate America are fond of starting; they’re counted as employed, but they may not be earning a living wage. And finally, the other huge hiding place for distortions in the official numbers for unemployment: those too discouraged to look for work, the very young college grads who don’t want to settle for fast food and retail, and those between 55-65 who have been, quite seriously, completely written off by the official structures of academe and business, and the economics profession, and disappear entirely from collected statistics, problematic as they are.

I’ve been proposing, for a long time, at least a decade now, a Civilian Conservation Corps, paid at the new minimum wage of $15.00 per hour – that many are striving for, I was on a 500 plus person webinar yesterday – and decent medical and leave benefits. There is no shortage of environmental and civic repair work to be done, but Mrs. Clinton’s proposal aims at something different, physical infrastructure, which also has to be taken care. My idea for a CCC would be driven by local projects, with a lot of science input, like from the U of Maryland Appalachian Research labs delineating restoration projects that will heal old coal mining damage to land and water, and now that from natural gas “fracking,” and address global warming at the same time. If we want to have a new CCC have a chance when the next crisis strikes, we have to begin delineating, in detail, all the mountains of work that is not getting done under current arrangements.

Of course, it looks like our nation is once again being primed for Round Four of Crusading in the Middle East. Good luck with that for a country which cannot decipher its own people’s employment needs, but proposes bringing free market capitalism to a region even harder to decipher. As the want ads for Crusading read: Translators needed.

The inflation is coming if the price of energy and raw materials are growing. Sometimes if people earns much money coming from firms after a war as it was in 1934 in Germany or in France in 1945. There is no reason to be afraid of it. Only banks don’t like it because they cannot lend money if it is moving up and down.

There is this widespread underlying assumption that it is bad if people don’t want to work. This leads people to suggest all sort of insidious ways we can put social pressure upon these people to get them look for work.

But what if decline in working desires is not a bad thing, but a good thing? What if it reflects society so wealthy that some members don’t feel the need to earn more money by working anymore? Then labeling declining employment ratios as a ‘problem’ would be fundamentally wrong, and any social engineering that tried to get these people to work would be a mistake and detrimental to our well-being.

Has increase in wealth levels finally caught up with our desire to work?

I don’t read the chart you linked to as “decisively” as you do: from the peak plateau of 95% employed in the late 1950’s, I see the most dramatic drops corresponding very closely to the well know dramatic recessions of the late 1950’s, 1970’s, precipitiously in 1982-83 and again in our 2008-2009 crisis. From that 1958 drop the employment rate comes back to 95% right about 1970.

You can argue that the plateaus reached after each recession start trending down, especially in the 1980’s, but so much else is going on in society and politics that it is very difficult for me to say that the cause is a healthy distance from the compulsion to work as Keynes meant it in some of his best writings. In my experience, especially around a guaranteed income, which emanates from some unusual ideological corners of society, there is a real upper middle class bias towards not being alarmed at the declining work rate…could this instead be one of those grand old “behind the backs” of capitalism’s most devoted advocates (Charles Murray in mind here) instances where such advocates know the system can’t achieve full employment…and that failure is turned into something else? (and I’ve reviewed Murray’s book at Amazon – coming apart – to detail everything he left out about the forces working against the working class he so strongly criticizes…especially I pointed out the Catholic Church could not withstand the cultural gales blowing through the society in the late 1960’s and 1970’s, esp. the sexual revolution, and the working class neighborhood he attacks in Phila was heavily Catholic…)

If you accept Piketty’s explanations and time schema, you can reach other conclusions; add in the fall in the minimum wage beginning in the late 1960’s…and median purchasing power per capita peaking around then as well…one conlcudes work stops paying well per jule of expended effort…

But we have lots of evidence that much else is going on in our society’s withou solidarity: in the US the increase in alcholism, drug addiction and suicide rates in the older end and working class end of society…is suggestive if not conclusive…of very different driving forces…and what is the one remedy that neoliberal capitalism will not, under any circumstance try, either here or in the minds of German bankers? It is public employment, whether of the CCC or WPA type, or L. Randall Wray’s employer of last resort as a guarantee of full employment…that’s a very important clue that much of importance is going on around this debate and blatant societal failure…even when served up in non-socialist Green New Deal terms, with eminent politeness and reasonableness by Yanis Varoufakis, for example…it is the ideological Rubicon that cannot be crossed…what does it tell us about the issues you are raising? I draw opposite conclusions…why should the private sector have a monopoly on the type and purposes of work in our society? Especially given the state of infrastructure and environmental deteroriation in the US; Pennsylvania and West Virginia still haven’t cleaned up the ravishes of the coal extraction empire yet, but have embarked upon fracking natural gas for yet new devastations…

I confess to coming from the camp which believe that work is still a very important component of individial identity and meaning, and the lack of it in widespread parts of society is not an indication of pleased plenty and a polite declension to work at all, but rather an increasing desperation on the part of those who don’t meet the private sector’s standards (many unspoken, esp. about age) in demanding the perfectly equipped employee ready to hit the profit treadmill at 100% stride on day one, after checking their civil liberties over the door. The rise of the mass incarceration state described by Michelle Alexander in the “New Jim Crow” and by Matt Taibbi in “The Divide” tell a very different story than the contenment and satisfaction you seem to favor…but the perceptions and experiences which lead to these very different lives and conclusions reveal a society of vastly different economic and life experiences…nothing “universal” here…but tradgedies of still vast enough scale…

I don’t pretend to neutrality in this debate…it is one area where if economists only look at narrow data they’re going to miss dramatic changes in society which bear upon the question with enormous weight.

Thank you dt1 – sounds like a robot designation doesn’t it – that’s always a good question to ask. Some on the decentralized left are pushing hard for locally grown, farm to table, a process, if you think about it, would reverse centuries of trends within ag to specialize for distant markets, starting in the pre-industrial revolution 16-18th century in merry olde England, the pioneer in “efficient” specialized ag. Yet if they achieve their goals, it will still be necessary to ask still, who owns the farm, even if now it is a 20 acre no tilling highly diversied organic farm, and designed to soak up as much CO2 as possible. All co-ops? Perhaps, but not guarantee of that.

I do support job guarantee, I know there many more people would be willing to accept normal job in their vicinity that paid at least minimum wage than people who get statistically classified as unemployed.

Maybe our unemployment measurement is flawed because it got deviced in a time when jobs were plentiful and unemployment spells short in duration, maybe the requirement that you should have been looking for work in the last four weeks in order to classify severely underestimates real levels of joblessness. And maybe if unemployment as statistical measure was defined today we would not even be looking in such a restrictive limitations on who would be counted as unemployed.

Despite the fact that we have some 20.000 economists in the world we know precious little what is happening in our societies, what do people really want, at least it seems so from the level of argumentations.

But I do say that contemporary capitalist culture is too biased towards work. It has been estimated that people in hunter-gatherer societies worked in average four hours a day, and work in agricultural societies was seasonal, and you worked in your home farm with your family at the timetables you choose. Modern society with its emphasis on selling your time to an employer is quite unnatural thing for us. Hence it is not surprising that when asked people would like to have shorter working hours, I have seen some polls from european countries at least where people clearly prefer better work-life balance.

The fact that we have so many people who would like to work but cannot find work and majority of people who do work feel that they are working too much speaks about very dysfunctional economics system where very few get what they want. Fundamentally it is about lack of democracy in workplaces; they are lead by managers so working times reflect their values, and managers as a group have very deviating values from from ordinary workers.

I would prefer if these problems were solved by lowering normal working times and getting work to those people who want to work but instead situation seems to be resolving by people dropping out of the labor force. In a world of haves and have not’s, many people seem to be able to afford it. For example, many people get sizable inheritance incomes.

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